John D.
Graham, Ph.D.
Administrator
Office of Information and Regulatory Affairs
Office of Management and Budget
Executive Office of the President of the United States

Remarks Prepared for Delivery to the National Economists Club

Library of Congress

March 7, 2002

The Office of Management and Budget is well known as the center of budgetary
policy in the executive branch, but OMB's role as a force for sound regulatory
policy is not well understood. Today I would like to discuss some of OMB's
recent initiatives to strengthen the analytic foundations of Federal regulatory
policy. Before doing so, I believe I need to provide some basic background
about the responsibilities of my Office at OMB: the Office of Information
and Regulatory Affairs (OIRA).

The best
way to proceed may be by posing the following question: "Why would any
clear-thinking President ask a senior OMB official with a modest staff
of 40 analysts to oversee the entire federal regulatory state?" Let me
suggest, at the outset, that any such effort might justly be considered
ambitious.

There are
over 100 federal agencies and subagencies with regulatory mandates from
Congress. They churn out 4,500 new rules each year. The 40 OMB professionals
in my office are obviously outnumbered by the thousands of regulatory
specialists in the agencies.

All significant
rulemakings must be submitted to OMB for review and clearance before they
are published in the Federal Register. Yet once a regulatory proposal
is formally submitted to OMB, there is already powerful organizational
momentum behind the proposal. Not only have agency staff devoted potentially
years of work to data collection and analysis; policy officials at agencies
may have managed delicate relationships among stakeholders. At this stage,
any changes suggested during OMB review are destined to make waves and
bruise egos, which means that they will be resisted, sometimes fiercely
and effectively.

It is sometimes
argued that the Congress, through legislative mandates and oversight,
should be the sole institution that instructs or guides the efforts of
agencies. From this perspective, any OMB "influence" on regulation might
be seen as extra-legal or even a perverse influence in democracy. And
of course there is the cynical view that OMB is simply the place where
nefarious deals are cut in the interests of lobbyists wearing alligator
shoes and Rolex watches.

Not surprisingly,
I do not share the view that Presidential management of the regulatory
state is hopeless or perverse. Rather, I share the vision of Supreme Court
Justice Stephen Breyer who described in his book, BREAKING THE VICIOUS
CIRCLE, an experienced cadre of civil servants in the Executive Office
of the President who have broad expertise in the craft of regulatory policy.
More importantly, these analysts are empowered to look beyond the tunnel
visions that plague individual agencies, thereby fostering a more holistic
approach to regulatory policy.

I think
the following empirical fact is instructive: Every President since Richard
Nixon, Democrat and Republican, has insisted on some type of centralized
management of regulatory policy. The common theme has been professional
analysis of regulations to make sure they are sensible. Given this history,
it is informative to consider why leaders are so determined to manage
the regulatory state.

For starters,
Presidents have recognized that, regardless of whether we like rules,
the federal regulatory state is here to stay. It is true that so-called
economic regulation - price and entry controls in specific industries
- has seen much privatization over the last 30 years. Yet the public and
Congress have revealed a growing commitment to public health, safety and
environmental protection. In fact, various forms of social regulation
of producers and consumers have been on the rise for over 30 years.

Capitalism
is at the heart of American society but citizens also recognize the limitations
of capitalism. For example, recent revelations about the Enron fiasco
have stimulated discussion of the need for appropriate public disclosure
requirements and other regulations. As we advocate more worldwide appreciation
of the form of democratic capitalism that America cherishes, we must continue
to improve the regulatory policies that are designed to curb the imperfections
of capitalism.

The policy
debate continues as to what level of government should possess the most
regulatory power. There is surely an urgent need for federal regulators
to consult with state and local officials and to respect the role of federalism
in our national system of government. Indeed, my boss, OMB Director Mitch
Daniels, has instructed me that I should return to agencies any proposed
rule that does not have adequate consultation with our intergovernmental
partners. This principle is particularly important when Washington seeks
to impose unfunded mandates on state and local officials. But we should
also respect the views of Alexander Hamilton, an important framer of our
Constitution. Hamilton recognized the weaknesses in the original Articles
of Confederation and the need for a strong centralized government to promote
the welfare of the republic. Indeed, there is growing consensus that in
certain fields of regulatory policy it is important for the federal government
to preempt the regulatory powers of state and local governments. In other
words, a thoughtful approach to regulatory policy envisions a substantial
role for the federal government. And this role will only become more important
as our nation engages in more international deliberations to harmonize
regulations with our trading partners.

While we
need federal regulators, let's face it: they are expensive. Now the total
budgets of federal regulators are not much greater than $8 billion per
year. But for every dollar that taxpayers provide to federal regulators,
another 100 dollars in cost is imposed outside the federal sector. Note
that this figure, $800 billion in aggregate terms, is larger than the
entire discretionary federal budget, amounting to an average annual cost
of almost $8,000 per household. These regulatory costs are like an invisible
tax on the consumer who typically does not realize that regulation is
causing higher prices for goods and services.

It is certainly
true that many federal rules have significant, even lifesaving, benefits
for households and future generations. OMB's recent Annual Report to Congress
describes numerous cost-effective federal regulations. Yet there is real
concern that regulatory resources are not always invested wisely, suggesting
that we could save more lives and do more for the consumer and taxpayer
through a simple reallocation of the regulatory dollar.

Certainly,
no one would suggest that agencies should be permitted to negotiate their
"on-budget" resources from Congress, without any OMB review. Likewise,
Presidents realize that regulatory expenditures, while off budget, require
fiscal restraint for the same reasons that the size of public budgets
need to be restrained. If the President restrains the federal budget without
restraining regulation, advocates of government spending may simply respond
by urging Congress to shift regulatory costs from the federal budget to
states and the private sector. In other words, the President cannot manage
the Nation's fiscal health without managing the regulatory state.

OMB also
has a role in conflict resolution. When two or more agencies disagree
about an issue, the President needs an experienced unit to forge a consensus
so that governance can proceed. OMB often plays that role in the regulatory
arena. For the last six months, OMB has worked with EPA and DOE and other
White House offices to devise a legislative strategy on the President's
Clear Skies Initiative, a market-based approach to achieving cleaner power
generation in America. This initiative calls for a 60-70% reduction of
air pollutants that have been associated with cardiopulmonary diseases,
asthma and lung cancer.

Of course,
Presidents use the powers of OMB regarding agency action to advance Administration
priorities and policy objectives. President Reagan pursued an agenda of
regulatory relief as one way to nurture a depressed economy riddled by
the misery index: double-digit rates of inflation, unemployment, and interest.
President Clinton used centralized review to promote a wide range of social
objectives such as tobacco and firearms control and children's health.
We should remember that OMB is an office within the Executive Office of
the President and its actions necessarily reflect Presidential priorities.

In this
Administration, OMB's Office of Information and Regulatory Affairs is
pursuing an agenda of quality regulation. What President Bush seeks is
a smarter regulatory process rooted in sound science, engineering, and
economics. A high-quality regulatory process is not uniformly pro-regulation
or anti-regulation. Instead a smart process adopts new rules when market
and local choices fail, modifies existing rules to make them more effective
or less costly, and rescinds outmoded rules whose benefits no longer justify
their costs.

We are pursuing
the agenda of quality regulation under the terms of the Clinton-Gore executive
order on regulatory planning, which we believe - though not always enforced
in the 1990s- is based on sound principles and procedures. The changes
we are making at OMB are not headline-grabbers: No far-reaching legislative
initiatives, no rhetoric-laden executive orders, and no campaigns of regulatory
relief. Yet we are making some modest changes that may have a long-lasting
impact on the regulatory state by increasing the roles of formal analysis,
peer review and public participation in regulation.

First, we
have taken steps to enhance the openness of OMB's regulatory review process.
Through the Internet, it is now possible for the public to scrutinize
how we use science and economics to stop bad rules and help agencies craft
better ones. Our web site is updated daily, providing unprecedented amounts
of information about our meetings with interest groups, our letters to
agencies, my speeches, and our reports to Congress. We are also an active
partner in a multi-year effort to link my office to the Administration's
E-government initiative, which will allow the public to provide interactive
inputs on OMB's web site. Now, I certainly do not believe that the Executive
Office of the President can operate in a fishbowl. There is a delicate
balance to be drawn here but I do believe that more openness at OMB about
regulatory review will enhance public appreciation of the value and legitimacy
of a centralized, analytical approach to regulatory policy.

Second,
we have reversed the 20-year decline in staffing at OIRA while recognizing
the increasing importance of science-based regulation. We are now hiring
the first physical scientists and engineers at OIRA to accompany a cadre
of economists, statisticians, and information technology specialists.
We believe this more diversified pool of expertise will enable us to ask
better questions about agency proposals.

Third, we
have sent clear signals to agencies that we care about regulatory analysis,
QUALITY regulatory analysis. We are using both the carrot and the stick.
The carrot we have offered is more deferential OMB review of proposals
that agencies have voluntarily subjected to independent peer review. Administrator
Whitman's recent decision on arsenic in drinking water was supported by
just that type of review. The stick has been a revival of the dreaded
"return letter". In the last three years of the Clinton Administration,
there were exactly zero return letters sent to agencies for poor quality
analysis. I have signed eighteen return letters in the last six months
and they are available for scrutiny on OMB's web site. A return letter
does not necessarily kill a proposed rule. In five cases so far, we have
cleared an improved version of a rule that we initially returned. Knowing
that we care, agencies are beginning to invite OMB into the early stages
of regulatory deliberations, where our analytical approach can be more
effective.

Fourth,
we have demonstrated that we are prepared to initiate new regulatory actions
when they are needed. I am not simply talking about the series of new
rules aimed at protecting homeland security, including airline safety,
food safety, and immigration control. President Bush himself recently
announced new regulatory steps to protect the 401(k) and retirement plans
of the American worker.

At OIRA
we have devised a modest tool called the "prompt letter" that OMB uses
to identify areas where agencies might improve regulatory policies. Our
first four prompt letters, available on OMB's web site, address potential
opportunities to save lives and improve health through cost-effective
regulation. One OMB letter involves FDA's deliberations on a rule that
would require labeling of foods for their trans-fatty acid content, an
important risk factor for coronary heart disease. Another OMB letter to
OSHA has stimulated a national information program to promote workplace
use of automatic defibrillators, a technology that saves lives from sudden
cardiac arrest and is already found in airports and federal buildings.
A recent letter to NHTSA suggests that priority be given to a new rulemaking
that would test cars and light trucks in offset crash tests, as well as
frontal crash tests, an approach that may reduce injuries in vehicle crashes.
And our most recent letter to EPA, has encouraged greater use of electronic
reporting under the TRI program, thereby allowing communities to obtain
this information more quickly. Unlike the more definitive Presidential
directive, the prompt letter is a public request that is intended to stimulate
agency and public deliberation. Final decisions about priorities remain
with the agencies.

In the
search for promising new regulations, we should not forget the urgent
need to streamline existing federal regulations. OMB does not believe
that across-the-board reviews of all existing rules are a cost-effective
use of agency resources; yet OMB does support selective reviews of existing
rules based on public participation. We recently sought public comment
in this area and learned of 71 specific suggestions to modify or rescind
existing rules. We have rated these ideas in our recent annual report
to Congress and are now in discussions with agencies about whether 23
suggested reviews should be an agency priority. We are also encouraging
interested parties to prepare additional nominations for the public comment
process on next year's annual report on the costs and benefits of regulation,
which should be released in the next month or so.

Finally,
and perhaps most importantly, OMB has developed government-wide guidelines
to promote better quality in both the formal analyses and original data
that agencies use and disseminate to the public. The OMB guidelines were
mandated by Congress and we have developed them pursuant to an extensive
public comment process. When agency information is so influential that
it forms the basis of major public policies, we go beyond the standard
of journal peer review and require that such information be reproducible,
or is at least highly transparent about research design, data sources,
and analytic methods.

When people
are harmed or otherwise affected by poor quality information that agencies
disseminate, the OMB guidelines provide new avenues for citizen complaints,
agency corrections, and formal appeals processes to resolve disputes.
Over the next year each agency, including the independent agencies, will
be preparing information-quality guidelines that OMB will review. The
agencies will be reaching out to the scientific communities and the public
to assist in this process and they will need your help. We urge you to
participate in this process because we believe it has tremendous potential
to enhance the competence and accountability of the federal regulatory
state.

Let me conclude
with three concrete illustrations of how OMB is making a difference in
the process of regulatory analysis and decision making. First, the National
Highway Traffic Safety Administration recently sent us a draft final rule
calling for all new vehicles to be equipped with a tire-pressure monitoring
system. OMB supports such a rule because it will help consumers know if
they have an under-inflated tire. Yet NHTSA's rulemaking supported what
is called a 4-tire standard by comparing that option to doing nothing.
We argued that NHTSA should instead compare the 4-tire standard to a meaningful
alternative, such as a 1-tire standard. Although the 1-tire standard would
provide less tire-related safety, it may have the side benefit of encouraging
more installation of anti-lock brake systems in vehicles that do not currently
have them. Our web site provides the details behind our concern. The general
point is that good regulatory analysis requires careful analysis of multiple
alternatives. Second, the Small Business Administration, out of concern
for the welfare of small travel agencies hurt by the events of September
11, recently sent a draft rule to OMB calling for a broad expansion of
the definition of a small business to 500 employees or less, even for
non-manufacturing industries. We argued to SBA that a more sensible approach
would be to modernize the definition of a small business in the travel-agent
industry. The general point is the lower-cost options should be analyzed
by agencies. Third, the President's Clear Skies proposal calls for a second
phase of pollution reduction at coal-fired powerplants beginning in 2010,
but only after a science and technology review is completed. OMB has argued
that we need better information about which particles in the air -- defined
by diameter and chemical composition -- are most responsible for adverse
health effects. If those particles come primarily from coal-fired powerplants,
then the marginal benefit analysis may favor steeper cuts in pollution
at utilities. Yet it could be the case that particles from diesel and
gasoline-powered engines are the most important culprit, in which case
the focus of particulate control may need to be directed at mobile sosurces.
The general point is that a good benefits analysis does not assume that
all tons of pollution were created equal.

Thus, I
hope that I have given you a better sense of the role that OMB is playing
in this Administration, particularly our role in enhancing the place of
science, engineering and economics in quality regulation. Thank you very
much for the opportunity to speak today and I look forward to questions,
comments and discussion.